Standard Deduction Or Itemize? Tough Call

YOUR MONEY - Taxes

November 1, 1998|By Julian Block

For 1998, most taxpayers benefit from a modest boost in the standard deduction - the no-proof-needed amount that is automatically available if it is not advantageous to itemize write-offs such as charitable contributions.

Just how much of a standard deduction are you allowed for 1998? The answer can be tricky: It depends on your filing status. The normal standard deduction increases to $7,100 for married couples filing jointly, or $3,550 if filing separately. Married couples filing separately have to handle their deductions the same way; if one spouse itemizes, so must the other. A frequently overlooked break is that the normal standard deduction is also $7,100 for someone who qualifies as a ``surviving spouse'' - Internal Revenue Service jargon for a widow or widower who has a dependent child and is entitled to use joint-return rates for two years after the death of a spouse in 1996 or 1997.

The normal deduction amounts are $4,250 for an individual with single filing status and $6,250 for a head of household.

Extra-large standard deductions for elderly and blind nonitemizers. There are higher deductions for individuals who are at least 65 by the close of 1998. The standard deduction goes up by $850 for a married person - whether filing jointly, separately or as a surviving spouse - and $1,050 for an unmarried person. Some examples: For a single person 65 or older, the deduction rises from $4,250 to $5,300. On a joint return, depending on whether one or both spouses are at least 65, the deduction rises from $7,100 to either $7,950 or $8,800.

Individuals who are blind are also entitled to the additional $850 or $1,050 - and more if they are both 65 and blind. For instance, the deduction rises from $4,250 to $6,350 for a single person who is at least 65 and blind.

Caution. Special restrictions decrease the deduction amounts allowed people (mostly children and elderly parents) who can be claimed as dependents on the returns of other individuals. The standard deduction can be as little as $700.

Strategy. Should your tax planning for 1998 be based on using the standard deduction or itemizing? For a good many of you, it may be a difficult call. The IRS clamps complicated ceilings on several categories of itemized deductibles.

Itemizers get full deductions for real estate taxes, interest on most home mortgages, charitable contributions and state and local income taxes. But there are only partial deductions for three categories of expenses: casualty and theft losses, allowable only to the extent that such uninsured losses exceed $100 for each casualty or theft, plus 10 percent of your adjusted gross income; medical expenses, deductible just for the amount above 7.5 percent of adjusted gross income; and most miscellaneous expenses (a category including write-offs such as return-preparation charges), allowable only for the part above 2 percent of adjusted gross income.

Forget about deductions for most payments of interest on consumer loans - credit-card charges, for instance. There is a limited exception for interest on student loans, starting with returns for 1998 to be filed in 1999. Also, there is a restriction on deductions for interest on money borrowed to finance investments, such as margin accounts used to buy stocks.

Investment interest expenses are allowed only to the extent of investment income, a grouping that encompasses dividends, interest and, subject to restrictions, capital gains.